Russia is the second-largest producer and the largest exporter of natural gas in the world. The country’s most important customers are in Europe where the bulk of its exports are consumed. The completion of the Power of Siberia pipeline, however, could be a pivotal moment for Moscow as it reduces its reliance on traditional customers in the West. Besides Russia’s relations with Europe, the completion of the pipeline could also affect the import of LNG into China and potentially the trade deal between Beijing and Washington.
China’s moment
Few countries are as important for the international gas market as China. The Asian country's economic development has made it the single most important market for exporters. China accounts for more than 40 percent of the growth in international gas demand.
The U.S., on the other hand, is the largest contributor to production in the world. The country will extract 92.10 billion cubic feet per day in 2019, which will be an all-time high. Therefore, increasing LNG exports would be one of the most obvious ways to reduce the negative trade deficit with China on which President Trump has put so much emphasis.
China last year produced 149 bcm of natural gas. The Asian giant is slated to increase its production and become the third-largest producer in the world by 2027. Beijing has set ambitious goals for its three state-controlled energy champions. By 2040 China aims to be producing 325 bcm of natural gas.
However, the Asian country’s demand is set to grow even faster. According to state-owned Sinopec, China’s natural gas demand should increase by 82 percent to 510 bcm in 2030 from 280 bcm in 2018. Both economic growth and Beijing’s coal-to-gas transition are accelerating the country’s gas demand growth. Related: Is This The Best Place In The World For Energy Investors?
Sufficient import capacity, therefore, is essential for China’s energy security. The country is already the world’s largest importer of natural gas when taking into account both pipelines and LNG. Although Beijing is well-connected to gas producing countries in Central Asia, LNG has proven to be vital to maintain a steady supply of energy. In 2022 China is projected to overtake Japan as the world’s largest importer of the supercooled fuel.
A game-changing pipeline
The completion of the Power of Siberia pipeline is the most important development for the Asian gas market in the short and medium-long term. The Russian and Chinese economies are very complementary with the former being a resources-rich country and the latter requiring large volumes of energy to power its development. Furthermore, strong political relations between Moscow and Beijing and a largely coinciding world view strengthen the pipeline's importance for both countries.
However, the official opening of the pipeline on December 2nd, couldn’t have come at a worse time. The U.S. and China have been locked in an escalating trade war. The signing of a ‘phase one’ trade deal would lower tensions between the world’s two largest and most important economies.
In Washington's case, the economy is slowing and an election year is looming. LNG is one of the few short-term options for reducing the trade deficit so that President Trump can maintain that his strategy vis-à-vis Beijing is working. It would also boost his reelection campaign. The Power of Siberia pipeline could become an impediment for a sustained Chinese commitment to import American LNG instead of cheaper Russian gas. Related: The Natural Gas Nation Every Exporter Is Targeting
Currently, the U.S. produces 46 million tonnes of natural gas per year (mpta). Another 27 mpta is approved, financed, and being built. The Power of Siberia pipeline, owned and operated by Gazprom, is designed to transport 10 bcm annually during the first couple of years and reach a peak capacity of 38 bcm by 2025. This is the equivalent of almost 25 mtpa of LNG.
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It means that in the short to medium-long term a significant part of China’s gas demand will be supplied by Gazprom. Siberian gas will most likely replace LNG in northeastern China. Several Chinese importers have already hinted that they are thinking of selling LNG cargoes on the spot market as they can buy cheaper piped gas.
However, the export of modest volumes of natural gas in the first couple of years of the pipeline’s lifetime will have a limited effect on the import of LNG. Therefore, China could commit to the import of more American LNG cargoes to cater to Washington’s demands. However, Beijing will tread carefully for any long-term commitment as it knows that it can import far cheaper gas from Russia instead.
By Vanand Meliksetian for Oilprice.com
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The Chinese gas market (both LNG and piped gas) is not only the biggest in the world but is big enough to absorb both US LNG exports as well as Russian piped gas through the Spirit of Siberia and more. Furthermore, China’s energy strategy like America’s is to diversify its sources of energy imports.
The trade war is not principally about oil or gas or China’s trade surplus and alleged Chinese malpractices. It is about the petro-yuan undermining the supremacy of the petrodollar and by extension the US financial system, Taiwan, refusal by China to comply with US sanctions against Iran, China’s overwhelming dominance in the Asia-Pacific region and its sovereignty claim over 90% of the South China Sea, the new order in the 21st century and above all fear of the US losing its unipolar status.
The delay in reaching a deal to end the trade war is because President Trump knows he has already lost the war and is looking for a face-saving way of presenting this to the American people. So he meanwhile muddies the water.
President Trump’s bizarre behaviour and his reneging on what he says from day to day are squarely behind the alternating moods of the global oil market between optimism and pessimism.
One day he gets the global economy excited by saying that the U.S. and China are in the “final throes” of reaching a trade deal and the following day he is threatening to slap new tariffs on Chinese exports thus deflating the economy. Another day he praises Chinese President Xi Jinping and the Chinese people to be followed almost immediately with signing a legislation supporting the demonstrators in Hong Kong. This is the behaviour of somebody with limited intellect and inability to see the wider picture.
His support of Hong Kong opposition is not only a blatant interference in China’s internal affairs but is also a crude ploy to shift global media focus away from his impeachment proceedings. China will retaliate for sure. Moreover, this will harden its attitude towards ending the trade war. China’s calculations are that the adverse impact of the war on the US economy coupled with the impeachment proceedings could cost President Trump the 2020 presidential elections.
However, it is very probable that President Trump will eventually swallow his pride and end the trade war against China if only to improve his chances of getting four more years in the White House.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London